Tuesday

26th May 2020

ECB boosts loans to €1 trillion to stop credit crunch

  • Fitch said the move will only 'delay' the collapse of weak banks (Photo: europarl.europa.eu)

The European Central Bank (ECB) will issue a second round of cheap three-year loans on Wednesday (29 February) in order to help cash-strapped eurozone banks.

In total, the bank is lending almost €1 trillion after it already injected some €500 billion into the system in December because euro-area banks became wary of lending to each other.

Read and decide

Join EUobserver today

Support quality EU news

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

The programme has so far been used mainly by Spanish and Italian banks to shore up funding gaps and buy government bonds. But it has done little to boost confidence in the sector, as evidenced by the record sums being 'parked' overnight in the ECB instead of circulating among lenders.

On Tuesday, for instance, €475 billion was given to the ECB for safe-keeping - almost the same sum that was to be made available in cheap loans.

Nordic banks such as Sweden's Nordea and Swebank said they would not take up the loans as they come with a "stigma" of a bank in need of help. Even though Sweden is not a euro-country, its banks are eligible for the loans because they have branches in eurozone states, such as Estonia and Finland.

Meanwhile, Greek banks will not be able to tap the funding after Standard & Poor's downgraded the country to "selective default," which technically prohibits the ECB to take on Greek bonds as collateral for loans. Emergency funding is available to Greek banks via the country's central bank, however - pending a decision by eurozone finance ministers on Thursday to let the temporary eurozone bail-out fund, the European Financial Stability Facility, to guarantee loans up to €35 billion.

For its part, the Fitch ratings agency has warned the ECB's unorthodox cash injection will only "delay the collapse of weak banks."

An economist from the ING Bank told this website that the programme amounts to a "sophisticated way of printing money" even though the massive loans are not "real money" issued in by euro printing presses, but "electronic money" which stays inside the system unless banks give it out as cash to individual customers.

"This will not automatically lead to inflation, only if commercial banks pour all money they get into the real economy," Carsten Brzeski explained.

"The credit crunch has not been avoided yet. The risk is still out there and the crisis is not over. There is still lack of liquidity in some banks and lack of demand for government bonds."

If some of the banks taking ECB loans go bust down the line or their collateral proves worthless, the ECB's own balance sheet would suffer.

Diego Valiante from the Centre for European Policy Studies, a Brussels-based think tank, said the real problem is that EU institutions have prohibited the ECB from helping governments directly, forcing it to expose itself to the more risky bank loan option.

"This additional cheap liquidity in the system is very risky for the ECB and the entire system. It creates a moral hazard for banks not to restructure and delays the problem even more," he told EUobserver.

Banks queue up for cheap ECB loans

Over 500 European banks rushed to borrow almost half a trillion euro in cheap loans from the ECB on Wednesday, highlighting the credit squeeze on the market. The cash injection only marginally increased investor confidence, however.

Sarkozy wants new role for euro bank

One week before elections, French incumbent Sarkozy has said the ECB should get a new mandate on economic growth - a no-go area for Germany.

Coronavirus

ECB promises (almost) whatever it takes

The eurozone's central bank has promised to buy up to €750bn of government and private bonds in new pandemic counter-measures.

Opinion

What does coronavirus 'Black Swan' mean for markets?

Falling demand and prices for oil and raw materials will revive the risk of deflation. The collapse in international trade and long-term rethinking of China's role as the major hub for the production of consumer goods and electronics is inevitable.

Stakeholders' Highlights

  1. European Sustainable Energy WeekThis year’s EU Sustainable Energy Week (EUSEW) will be held digitally!
  2. Nordic Council of MinistersNordic states are fighting to protect gender equality during corona crisis
  3. UNESDACircularity works, let’s all give it a chance
  4. Nordic Council of MinistersNordic ministers call for post-corona synergies between economic recovery and green transition
  5. Nordic Council of MinistersNordic co-operation on COVID-19
  6. Nordic Council of MinistersNordic research collaboration on pandemics

Latest News

  1. Recovery plans unveiled This WEEK
  2. EU and UK stumbling into Irish border crisis
  3. Malta patrol boat 'intimidates' capsized migrants
  4. How coronavirus might hit EU defence spending
  5. Herman Van Rompuy on power and influence in the EU
  6. EU links access to recovery fund to economic advice
  7. EU wants to halve use of pesticides by 2030
  8. Top editors alarmed by media cuts in EU and beyond

Join EUobserver

Support quality EU news

Join us